I’ve been asked why I focus so much on restructuring the market as a way to address problems of inequality and poverty as opposed to tax and transfer programs. There are ideological, economic, and political reasons for this focus, which I will take in order.
On the ideological side, there is a commonly held view that the winners in the economy got there through a combination of luck, skill, and hard work. The losers scored less well in these categories. The central question from the standpoint of public policy then ends up being whether we should feel sorry for the losers, or at least sorry enough to take something away from the winners. Conservatives are mostly comfortable leaving distribution where it is, while liberals have guilty consciences so they feel we should help out the people at the bottom.
Rejecting loser liberalism means not accepting this framing. The winners did not win just by luck, skill, and hard work, but also by rigging the deck. For example, they construct trade deals to make U.S. manufacturing workers compete with low-paid workers in the developing world. The predicted and actual consequence is to reduce the employment and wages of U.S. manufacturing workers. Meanwhile, they maintain or increase the protections that make it difficult for people from developing (or developed) countries to train to U.S. standards and work as doctors, lawyers, and other highly paid professions in the United States.
The winners also made patent and copyright protection stronger and longer, with the predicted and actual effect of shifting more money to the small segment of the population that benefits from these forms of protection. And the winners have conducted a monetary policy, through their control of the Federal Reserve Board, which sustains higher than necessary rates of unemployment. The effect of excessive unemployment falls disproportionately on those at the middle and bottom of the wage distribution, not only increasing their risk of unemployment, but lowering the wages of those who do have jobs.
The point is that we did not just end up with a situation where some people are extremely wealthy and many people have little or nothing, we have policies that were designed to bring about this result. We don’t have to ask the wealthy to feel compassion for the poor or have guilty consciences over their good fortune. We need to stop the wealthy from rigging the game so they continue to end up with all the money.
On the economics, there really is a benefit to leaving things to the market, where we can. Markets are often very efficient allocators of resources. Individual farmers, deciding on the best way to maximize profit, are likely to make better decisions on crop mixes than the government planning bureau. They know their individual plots, the central planning agency doesn’t.
In addition, there really is validity to the conservatives’ complaints about taxes eroding incentives. It is not so much the case that we will get less work and investment out of the rich if we tax them more, but we will see them spend much more effort and money on tax avoidance. This is a complete waste from an economic standpoint and in fact often a source of inequality. Much of the profit in the private equity industry, which has produced many billionaires, stems from its innovative use of tax avoidance strategies.
Furthermore, undoing many of the market riggings that redistribute upward will lead to more growth rather than less. If we had free trade in physicians services, so that smart students in India, China, or anywhere else could train to U.S. standards and practice in the U.S., it would lead to sharp reductions in physicians salaries and also large reductions in health care costs. This has the same benefit to the economy as removing an excise tax on health care. If we financed the research and development of prescription drugs through public funds and then let new drugs be sold in a free market, the savings would on the order of $320–$360 billion a year. This is another enormous tax reduction.
And of course if the Fed keeps its foot off the brakes and lets the economy expand more, and lets more workers get jobs, it is entirely a free lunch. We could easily be talking about another $360 billion a year in output, the bulk of it going to those at the middle and bottom of the income distribution.
This brings us to the point about politics. We can develop measures that lead to greater equality that conservatives cannot oppose based on an argument about free markets. These measures are every bit as much free market as anything they propose. They also can’t oppose them based on the economics. Patent protection that raises drug prices 10,000 percent above the free market price has all the negative effects of a 10,000 percent tariff on cars or steel. In fact, the effects are far worse both because there is an enormous problem of asymmetric information with drugs (the drug companies know much more than we do about their drugs) and this is also a matter of people’s health and lives.
The same story applies to free trade in highly professional services. The economics are on the side of progressives.
Of course, the drug companies and the doctors will still oppose measures that reduce their income with all of their political and economic power, but at least the story here is clear. Their arguments have nothing to do with respect for free market principles, nor are they based on a concern with overall economic well-being. They are arguing to preserve the status quo because it gives them lots of money, and that is the battleground we want.
 We can repatriate a portion of foreign doctors’ earnings (e.g. their income tax) to their countries. This should enable them to train two or three doctors for every one that comes to the United States, ensuring that they gain as well in this arrangement.